The Coca-Cola Company - Q4 2022

Transcript

Operator (participant)

At this time, I'd like to welcome everyone to The Coca-Cola Company's fourth quarter and full year 2022 earnings results conference call. Today's call is being recorded. If you have any objections, please disconnect at this time. All participants will be on listen-only mode until the formal question and answer portion of the call. I would like to remind everyone that the purpose of this conference is to talk with investors and therefore questions from the media will not be addressed. Media participants should contact Coca-Cola's media relations department if they have any questions. I would now like to introduce Mr. Tim Leveridge, Vice President of IR and FP&A. Mr. Leveridge, you may now begin.

Tim Leveridge (VP of Investor Relations)

Good morning, thank you for joining us. I'm here with James Quincey, our Chairman and Chief Executive Officer, and John Murphy, our President and Chief Financial Officer. We've posted schedules under Financial Information in the Investors section of our company website at coca-colacompany.com. These schedules reconcile certain non-GAAP financial measures which may be referred to by our senior executives during this morning's discussion to our results as reported under generally accepted accounting principles. You can also find schedules in the same section of our website that provide an analysis of our gross and operating margins. In addition, this call may contain forward-looking statements, including statements concerning long-term earnings objectives, which should be considered in conjunction with cautionary statements contained in our earnings release and in the company's periodic SEC reports. Following prepared remarks, we will turn the call over for questions. Please limit yourself to one question.

If you have more than one, please ask your most pressing first and then reenter the queue. Now, let me turn the call over to James.

James Quincey (Chairman and CEO)

Thanks, Tim. Good morning, everyone. 2022 was a strong year for us. We executed well and grew amidst a challenging macro environment. We did this in part by focusing on expanding the sphere of what was in control. We delivered on our top line and bottom line guidance. We continued to create value by investing in our loved brands, even as we faced a very dynamic backdrop. Today, I'll reflect on our 4th quarter and the year's performance and set the stage for 2023. I'll also share how we're operating differently today, which makes us confident in our ability to deliver our 2023 guidance and well equipped for a future that continues to be volatile and uncertain. John will discuss our results and our 2023 outlook in more detail.

During the fourth quarter, the environment remained dynamic as inflation, geopolitical tensions, pandemic-related mobility restrictions, and currency volatility persisted. Despite this range of factors, consumer demand held up relatively well, our industry remained strong. In the fourth quarter, we remained focused on our growth strategy and continued to create value for our consumers and customers. We maintained agility to navigate this challenging environment and delivered 15% organic revenue growth in the quarter with strong growth across operating segments. This was driven by pricing actions across markets and revenue growth management initiatives to retain and add consumers. While we saw robust volume growth across many markets, this was more than offset by the suspension of our business in Russia and the impact on consumption driven by varying levels of pandemic-related mobility restrictions and the surge in COVID cases in China.

Overall, throughout 2022, we have maintained consistent volume growth relative to 2019. We've gained both volume and value share for the consolidated business for both the quarter and the year. Far in 2023, the volume growth trends versus 2019 are in line with last year, and we are laser-focused on executing on our growth plans. Our streamlined portfolio of global and local brands and stepped up consumer-facing investments continue to fuel the competitive edge of the Coca-Cola system to deliver value in any environment. Our networked organizational structure enables this strategy. We've connected our operating units, our functions, and our platform services organization for strong end-to-end coordination, which helps us identify key opportunities for meaningful long-term growth. On top of this, we remain well-aligned with our bottling partners, which further builds on our strength as a network system.

As we look to 2023, many uncertainties remain in the macroeconomy, whether from economic policies, consumer demand, inflation, supply chain, war, and geopolitics. Instead of trying to forecast and predict the many directions things could move, we are focused on delivering on our key objectives. Firstly, pursuing excellence globally and winning locally through relentless consumer centricity to continue the top-line momentum. Secondly, investing for the long-term health of the business and raising the bar across all elements of our strategic flywheel. Thirdly, generating US dollar EPS growth to deliver value for our shareowners. We continue to build the right capabilities and strengthen the system alignment to deliver in a dynamic world, and we continue to invest to raise the bar. We are executing more efficiently and effectively on a local level while maintaining flexibility on a global level.

Throughout 2022, we saw many examples of harnessing our enhanced capabilities to win locally. Our new marketing model is working. We've linked occasions and passion points to drive engagement. We're experimenting to optimize marketing. This is driving deeper connections with consumers, reaching them in unique and new ways. We are tying our beverages to consumption occasions and engaging consumers through local experiences. For example, in Vietnam, to support the reopening of away from home accounts, we launched the pilot of Coke is Cooking campaign in October. In this month-long campaign to help drive traffic back to stores, we partnered with more than 700 food shops. We created thousands of food and Coke combo deals that consumers purchased at these food shops, along with Coke is Cooking merchandising and digital support by local influencers.

This was the first time we used an on-ground event as a commercial asset, creating a social and digital content generator. The campaign resulted in more than 1 million combo transactions and 20% uplift for participating merchants. We're leveraging passion points locally to create immersive experiences and drive consumption. For example, in Latin America, our live music strategy created memorable in-person and digital experiences elevating consumer engagement. We partnered with Rock in Rio, one of the biggest music festivals in the world, and created new opportunities for consumers to access content through live streams and in the metaverse. As a result, we boosted our reach from approximately 700,000 attendees to more than 45 million consumers across the region, and our sales inside the festival increased 23% versus the last festival.

In India, the Thums Up Stump Cam was a never-before-seen activation for cricket fans, where consumers could scan a QR code on product label and get access to exclusive match moments of the ICC T20 Cricket World Cup through a camera installed on one of the wickets. Throughout the 45-day tournament, we used first-party data and artificial intelligence to send personalized content to consumers based on their favorite matches, and we amplified the experience through sports influencers. This campaign showed strong results with Thums Up growing volume ahead of our total sparkling portfolio in India during the activation period, contributing to strong volume growth for Thums Up for the full year. This drove about one quarter of India's total volume growth for the year. Thums Up also experienced its highest monthly market share jump during the activation period.

We are driving consumer interest and action through digital experiences using the power of partnerships across platforms. For example, in Germany, we partnered with our key online customer and created voice-based branded experiences with its voice assistant to drive engagement and grow positive brand perception. This allowed consumers to learn more about Coca-Cola products and shop on voice assistant-enabled devices using only their voice. The campaign delivered strong results with a reach of 11 million impressions. Additionally, consumers who engaged with this voice-based experience had a 25% add to cart rate. Lastly, we're delivering new and unexpected innovation by leveraging Gen Z insights. In the U.S., we launched Minute Maid Aguas Frescas. The product is made with real fruit juices, is non-carbonated, and comes in three exciting flavors. It was originally available as a limited launch in 16-ounce ready-to-drink cans.

A disruptive end-to-end digital media marketing campaign created early momentum, which led us to quickly scale this experiment to our Freestyle platform and other fountain offerings. In 2022, the product had a 60% repeat rate and won the best new product award from Convenience Store News. We have been building our revenue growth management and execution capabilities for many years, and we've made good progress as shown by our ability to offset much of the inflation we saw in 2022 and deliver strong volume and transaction growth. There is still much work to be done to maximize revenue by further segmenting our markets and consumers based on additional variables. We're leveraging digital and data-backed insights to better understand our consumers. This will help drive affordable propositions for basket incidence growth and recruit new drinkers. It will also lead to premiumization to drive price and mix.

For example, in Europe, we grew both volume and value share for the last year. We partnered with key customers to drive growth through affordability and premiumization initiatives that tapped into the key consumption occasions of meals and breaks. This end-to-end execution resulted in higher basket incidents and buying households across all key channels in Europe. Globally, this strong system execution focus generated 80 million additional shopping trips for our products and added 17 million households to our base. Through our stepped-up capabilities, we are getting better at synchronizing demand creation and demand fulfillment, driving top-tier value creation for our customers. We measure success by the value we create for our stakeholders and by how we are creating a better shared future for people, communities, and the planet. During 2022, we made progress across these sustainability priorities.

We leveraged our marketing power to drive growth of our low and no-calorie beverages and continued to provide smaller package choices to enable consumers to manage sugar intake. Approximately two-thirds of the products in our portfolio have less than 100 calories per 12-ounce serving. On packaging, we set a new industry-leading goal to have 25% of our volume globally being refillable or reusable packaging by 2030. Additionally, we are continuing to increase cooler energy efficiency and the use of HFC-free coolers to make progress on our science-based targets while creating a clear roadmap with our system and suppliers to achieve our carbon emissions reduction ambition.

On water, as part of our 2030 water security strategy, we stepped up investments in nature-based water solutions, exemplified by the work we're doing with The Nature Conservancy and other partners. Globally, we are working to strengthen the links between replenishment projects and nature-based solutions. We further embedded sustainability into our strategy by linking diversity, equity, and inclusion performance measures to our executive annual incentive program and by linking water and RPET packaging measures to our executives' long-term incentive program. Overall, we continue to focus on using our leadership and scale to drive change while delivering results and building resilience. Finally, before I hand it over to John, I want to acknowledge that our strong results in 2022 reflect the collective efforts of our system partners and the growth mindset of our system employees.

Guided by our purpose, we are investing behind our capabilities and further cultivating our growth mindset to be well-positioned to create value and deliver on our objectives. While we have momentum in our business, we know uncertainty remains as we turn the page to a new year. We will continue to focus on expanding the sphere of what we can control to drive growth in 2023 and beyond. We'll talk about this in more detail when we return to CAGNY in person next Tuesday, and would encourage all of you to listen in. With that, I'll turn the call over to John.

John Murphy (President and CFO)

Thank you, James, and good morning, everyone. In the fourth quarter, we continued to drive strong top-line-led results as we executed for growth in a dynamic operating environment. We grew organic revenues 15%. Unit cases declined 1% as broad-based growth across most markets and investments in the marketplace were more than offset by the suspension of business in Russia and a decline in China. Concentrate sales were three points ahead of unit cases for the quarter, primarily driven by 1 additional day and the timing of concentrate shipments. Our price mix growth of 12% was driven by pricing actions across operating segments, along with revenue growth management initiatives and favorable channel and package mix.

Comparable gross margin for the quarter was down approximately 90 basis points versus the prior year, mainly driven by currency headwinds in a volatile macro backdrop and the mechanical effect of consolidating the BODYARMOR finished goods business. Underlying gross margin was in line with the prior year, driven by strong organic revenue growth, offset by higher commodity costs. We continued to significantly accelerate our marketing investments to engage and retain existing consumers, as well as to gain new consumers. Despite higher costs across the P&L, increased marketing and currency headwinds, comparable operating margin expanded 65 basis points for the quarter. This was primarily driven by underlying operating margin expansion due to robust top-line growth across operating segments. Importantly, this resulted in full-year comparable operating margin being in line with the prior year, despite significant currency acquisition and cost headwinds.

Below the line, we were impacted by higher net interest expense along with lower other income due to cycling higher pension income from the prior year. Fourth quarter comparable EPS of $0.45 was in line with last year, despite higher than expected currency headwinds. This resulted in full-year comparable EPS of $2.48, an increase of 7% versus the prior year, driven by strong underlying business performance, partially offset by 10 points of currency headwinds. For the year, we delivered free cash flow of $9.5 billion, a decline of 15% versus the prior year. Much of the decline versus our expectations occurred due to the deliberate buildup of inventory in the face of a volatile commodity environment and higher than anticipated tax payments.

Additionally, cash flow was impacted by cycling working capital benefits from the prior year and higher incentive payments in 2022. Even with these items, our underlying cash flow generation remains strong and we continue to make progress on our cash flow agenda. Our three-year average free cash flow conversion ratio is above 100% ahead of our long-term target. Our balance sheet remains strong with our net debt leverage of 1.8x EBITDA as of the end of 2022, which is below our targeted range of 2x-2.5x. Our capital allocation priorities remain the same. We continue to prioritize investing in the business to drive long-term growth, as well as delivering dividend growth for our shareowners.

At the same time, we remain mindful of maintaining our financial flexibility amidst the ongoing tax dispute with the IRS and are learning from the last few years of how important it is to build resilience in all of our plans. As James mentioned, in 2023, we expect the operating environment to remain dynamic. We have the right portfolio, a very focused strategy, a flexible and adaptable structure, and a system with the ability to reinvest in the business. This gives us the confidence that we will continue to deliver on our three key objectives, pursuing excellence globally and winning locally, investing for the long-term health of the business, generating U.S. dollar EPS growth.

With that in mind, this morning, we provided guidance for 2023 that builds on our strong results in 2022. We expect organic revenue growth of 7%-8%, primarily led by price mix amidst the ongoing inflationary environment. We expect comparable currency neutral earnings per share growth of 7%-9% versus 2022. Since we provided our initial outlook on currency in October, the currency environment has improved but remains volatile. Based on current rates and our hedge positions, we anticipate an approximate two to three point currency headwind to comparable net revenues and an approximate 3-4 point currency headwind to comparable earnings per share for full year 2023. Based on current rates and hedge positions, we expect per case commodity price inflation in the range of a mid-single digit impact on comparable cost of goods sold in 2023.

We continue to expect our underlying effective tax rate to be 19.5% for 2023. All in, we expect comparable earnings per share growth of 4%-5% versus $2.48 in 2022. We expect to generate approximately $9.5 billion of free cash flow in 2023 through approximately $11.4 billion in cash from operations, less approximately $1.9 billion in capital investments. I would like to highlight that included in the $11.4 billion of cash from operations are two discrete items. Transition tax payments of approximately $720 million, a scheduled increase of $335 million versus 2022. Payments associated with various M&A transactions of approximately $350 million. Excluding these, our implied free cash flow conversion would be within our long-term guidance.

This guidance does not include any payments related to our ongoing U.S. income tax dispute with the IRS. Recently, the tax court issued an opinion on a case involving a separate company. The tax court will now apply this opinion to our case and ultimately render a final decision in our case, allowing us to move forward with the appeals process. As previously discussed, we intend to assert our claims on appeal, vigorously defend our position, and believe we will ultimately prevail. Overall, we don't expect this to have a bearing on our ability to deliver on our capital allocation agenda and drive long-term business growth. There are some considerations to keep in mind for 2023. We expect price/mix to moderate through the year as we cycle our pricing initiatives from the prior year.

While the inflationary environment appears to be cooling, we are still expecting to see elevated inflation across our operating costs. We have stepped up our marketing investments over the last few years, and we will continue to invest to support momentum. Given the ongoing backdrop of rising interest rates, we expect to see higher net interest expense given our effective exposure to floating rate debt. Finally, due to our reporting calendar, there will be one less day in the first quarter and one additional day in the fourth quarter. Having delivered strong results in 2022, we are focused on driving a top-line led growth equation in many types of environments. We are well-positioned to deliver on guidance for 2023, thanks to the incredible people we have around the world, the strong alignment we have with our bottling partners, and the great plans we have for the coming year.

With that, operator, we are ready to take questions.

Operator (participant)

Ladies and gentlemen, to ask a question, you'll need to press star one on your telephone. To withdraw your question, press star one again. In the interest of time, we ask that you please limit yourself to one question. If you have any additional questions, you may rejoin the queue. Our first question comes from Lauren Lieberman from Barclays. Please go ahead. Your line is open.

Lauren Lieberman (Managing Director)

Great. Thanks. Good morning. I guess in light of John's comment just now about, you know, a top-line led growth equation, I was hoping you could talk a little bit through the outlook for 2023 on top line. Just kind of puts and takes, how you think about that 7%-8% relative to the, you know, mid-teens put up in the fourth quarter. Just kind of more color overall on that revenue outlook for this year would be great. Thanks.

James Quincey (Chairman and CEO)

Yeah, sure. Morning, Lauren. Firstly, as John said, we feel confident about our outlook to drive drive the year from the top line. Let me connect that perhaps starting to 2022. As we commented, we saw steady volume growth through the year, including the fourth quarter. I know we reported a headline number of -1. If you accommodate the suspension of Russia and the COVID restrictions in China and take a three-year CAGR of volume growth, you see a pretty constant growth momentum through the year. We would also comment that that growth momentum has continued into the beginning of 2023. We see strong underlying volume momentum or ongoing volume momentum that-

That we have been able to achieve by our focus on the marketing, innovation, the RGM, and the execution, to accommodate the need for affordability and premiumization in the face of inflation. As John commented, we do see both inflation moderating as we go through 2023 and of course, our own pricing, PMO beginning to moderate as we go through 2023, in part because the input costs, inflation is moderating, but also 'cause we begin to cycle some of the price increases from 2022. What that's likely to net out as, obviously we've given a 7%-8% for the full year.

What we're likely to see is the beginning, the Q1, we're likely to see revenue growth, more close to what the sorts of levels we were achieving coming out of the out of last year. That then logically, the organic growth rate moderates as we get towards the end of the year, looking to close out under a more normalized level of revenue growth. When you average that out, you get to the 7%-8%. I think we're gonna see good momentum through the year, moderating revenue growth rate as a function of moderating inflation ultimately.

What will remain is a good, strong, underlying momentum of our business that has been powering the last five years, and we are confident will continue to power the years ahead at the sort of level of top line relative to the long-term growth model that we have previously talked about.

Lauren Lieberman (Managing Director)

Okay. Great. Sorry, can I? I don't know if my line was open. Okay. Just a quick clarifying point on that, I apologize. Was just to think about volumes, and whether you wanna talk about in terms of concentrate sales or unit case volume. Do you still expect growth in the second half of the year from a volume standpoint? Or do you expect?

James Quincey (Chairman and CEO)

Firstly, we had good growth last year, and we started the year with growth in unit case growth, obviously with PMO. As we look forward, what's normal on our revenue growth rate, we have called out, we expect to get a balance of the growth between unit cases and price mix on a longer basis. Exactly how that turns out in the second half will depend on the environment, the dynamics, and whether inflation does moderate, how much pre-pressure the consumer does come under. Our central view is we will continue to see unit case growth in the second half combined with price mix moderating, as I talked about as the organic, overall organic trend. Our focus, you know, it remains executing against our plan.

Obviously, that involves not just a focus on the marketing and the innovation, but within the RGM, we have, as one of our objectives, to maintain consumers within our franchise, by leveraging our pricing and packaging strategies to support affordability, around the world to keep the lower, perhaps lower income consumers in the franchise, which of course is to some extent an underpinning, on volume. We prefer that as a strategy than to, have more price and less volume. Again, our central view is to see continued level of unit case growth, in the second half, with obviously a moderating price mix to get to the, to the overall revenue. We're gonna manage the business. In the end, we don't know exactly what's gonna happen.

There are lots of scenarios, as to how this all might play out. We're confident we can drive the momentum of the business.

Operator (participant)

Our next question comes from Dara Mohsenian from Morgan Stanley. Please go ahead. Your line is open.

Dara Mohsenian (Managing Director, Beverage, and Household Products Analyst)

Good morning, guys. Just to follow up on that, James, can you give us a little bit of detail regionally on expectations for 2023? I know you're not gonna quantify it, but just how you're thinking about the business conceptually, you know, relative to the results you delivered in Q4 here, and take us around the world regionally. Then I guess just secondly, if I can slip a clarification in. You're obviously starting off the year with top line guidance, higher than you typically do, higher than long-term algorithm, higher than you started 2022 at, despite, you know, delivering great results in 2022. You know, it's a less visible world in theory externally. I guess it sounded more like a good start so far this year.

You have a lot of visibility given that, and that's what's driving some of that confidence. I'd love to hear, from your vantage point what sort of gives you the confidence there. Thanks.

James Quincey (Chairman and CEO)

Sure. I'll take that in reverse order, Dara. We'll count that as two halves of a question rather than two questions. Let me give you another way of thinking about 2023, 'cause I agree, there is a good deal of uncertainty as to how this might play out. There's been a tremendous amount of volatility and uncertainty over the last five years or four years. If you were to take a compound annual growth rate of unit cases and price mix over the last, I don't know, four or five years and look at that number, I think you'd end up with something around two on volume and four or five on price. You could look back and say, "Wow, we were on a crazy ride there." In the end, we got a good number.

I look at 23 and say, yes, something unexpected is bound to happen. As we have expanded our ability to influence our own business, we have been adaptable in the face of all sorts of circumstances, able to deliver the results we want, which is winning locally and turning that into a U.S. dollar EPS growth. That's what gives us the confidence. We don't know what's gonna happen, but we do know we've generated a lot of momentum, a lot of flexibility, and a lot of agility to be able to manage through what's gonna come at us. That's really the source of the confidence rather than being able to say we know what the future holds entirely.

As we walk around the world, you know, taking the various different pieces, starting in Europe perhaps, or in EMEA, clearly Europe's under some more pressure. The impacts of the conflict drove, you know, a much greater short-term spike in inflation, that's playing itself through. It looks like the European economies are going to avoid a technical recession, but clearly consumer demand is softening. I think that's likely to continue into the rest of the year. Looking at the other markets in EMEA, if you're a resource seller, you're doing well. If you're a resource buyer, you're under more pressure. Obviously, Turkey, tragic situation with the earthquake, but also the economy has been under pressure already.

The emerging markets there are a full range. Similarly, in Africa, you know, South Africa's important to us. They've got a very big problem in terms of energy, which is hampering the economic growth. There's more pressure in EMEA. The U.S. continues to be strong. We've got momentum in the business on the top line, doing well. The situation seems to be moderating without causing a hard landing. As of yet, we expect to see the pressure to continue to moderate. The economy, and the consumption, at least of beverages, continues to be good. Latin America, similarly, there's been, you know, obviously, there's some places which continue to have very high inflation and economic problems like the Argentinas of the world.

Latin America is doing well. Out to Asia, obviously the reopening of China is gonna be a positive for the business, certainly on a cycling basis. India is flying. ASEAN will, we expect come back up as those two large economies do well. And we think that will also, you know, do well for Japan. We see both a continued acceleration or a continued growth in a number of markets, some doing really well, but the general context being a moderation of the inflation. Now, the zillion-dollar question always comes back to, is the process of bringing inflation down gonna be hard, soft, or a perfect landing? That we will see.

Operator (participant)

Our next question comes from Bryan Spillane from Bank of America. Please go ahead, your line is open.

Bryan Spillane (Bank of America Securities)

Hey, thanks, operator. Good morning. Just a question for John, I guess to just related to cash flow and interest expense. I know you talked about net interest expense being up for the year in 2023. Can you just give us a little bit more detail in terms of... I think consensus is sitting at, like, $600 million for net interest. Just if you could give us a little more help in terms of where we should be on net interest expense. On free cash flow, you talked about the drivers that, you know, knock it down in 2023. Would we expect that as we kind of go into 2024, 2025, like, that should normalize? Is this more of kind of contained within this year and then you expect to normalize going forward?

Thank you.

James Quincey (Chairman and CEO)

Thanks, Brian. Let me start with the second question. The key drivers for 2023, we have on top of strong underlying performance, we'll have two significant buckets. One is we are stepping up our capital investments to support the growth agenda in a number of our operations around the world. That's $400 million increase in 2023. We have approximately $700 million related to an uptick in the transition tax and some M&A related initiatives. For 2024, we'll continue to invest in the business as the business needs, especially, when it comes to providing capital for growth plans. The transition tax goes up $200 million in 2024. That'll be the second last year of the transition tax day that ends in 2025.

You can do the math on the variance that's gone in from 23 to 24. We expect the underlying performance to continue. We'll invest as we need to in the business to support the growth agenda. We do have, I'd say, a couple of hundred million extra in 24 on the transition tax. With regard to interest, you know, we as we've highlighted, With our current debt portfolio, we will see an uptick in 23 in interest charges and interest expense. I'm not gonna go into the specific numbers, but you can expect a couple of points of deleverage primarily driven by interest expense as we as we navigate through this year.

Operator (participant)

Our next question comes from Steve Powers from Deutsche Bank. Please go ahead. Your line is open.

Steve Powers (Managing Director and Lead U.S. Consumer Packaged Goods Analyst)

Yes. Hey, good morning. Thank you. James, maybe going back to the top line. For a while, you've been making simultaneous efforts to drive both affordability on the one hand and then premiumization on the other hand. I think doing a good job along the way, balancing those in some ways competing efforts to, you know, net out in a way that ends up in both positive volume and positive price mix territory. I guess the question is, as you, as you look at 23, do you see more opportunity in your efforts to optimize revenue growth on the, on the value side and the affordability side, or is it on the premiumization side? To the extent that there's a leaning, you know, how does that impact, you know, where you prioritize incremental investment?

James Quincey (Chairman and CEO)

Yeah. Thanks, Steve. Absolutely, we see opportunities in 23 and, frankly, beyond, to continue to leverage the capability around RGM to both use affordability to keep typically lower income consumers connected and engaged with our brand franchises whilst also pursuing premiumization. That is gonna be a dynamic implementation as we go forward. We're going to see continuations into 2023 of different sorts of packaging options, whether they be drives around returnables, whether they be drives which obviously tend given the economics of returnables to have lower price points. Whether you see, for example, in emerging markets the greater use of 1 liter packaging instead of larger packaging for at home occasions.

We're gonna continue to see a lot of opportunity to push forward right across the world with affordability options. Given that they tend to be dilutive to margins, we also look for all those consumer opportunities for premiumization. Whether it be directly a brand launch, I mean things like the Jack and Coke will be accretive to revenue or directly within some of our brands to use the sleek cans and the smaller cans to kind of put more premium packaging into the marketplace. Yeah, it will be an ongoing ongoing effort, and we don't see the runway of that running out anytime soon.

Operator (participant)

Our next question comes from Nik Modi from RBC Capital Markets. Please go ahead. Your line is open.

Nik Modi (Managing Director and Co-Head of Global Consumer and Retail Research)

Thanks. Good morning, everyone. I just, James, I just wanted to follow up on the last question regarding all the affordability packaging. You know, just based on the historical kind of observations across the world, how does it work with retail? I mean, are these incremental facings you're getting, or is it replacing older pack sizes that, you know, might have a lot more price sensitivity?

James Quincey (Chairman and CEO)

It can be both, Nik. Obviously it depends whether we're talking about supermarkets, convenience stores or small mom-and-pops. The more we're talking about smaller stores, so convenience or the mom-and-pop, the more it is a replacement. Obviously, we make a big focus even in those smaller formats to gain incremental space, whether it be in the cold vaults or on the floor with our own coolers and our own racks. That absolutely does increase beverage category facings.

There's nothing wrong in any given store with looking at the SKU layout and saying, "Look, I'm gonna take some of these SKUs and make them replace them with more affordable SKUs, and I'm gonna take some of them and put more, more premium options in such that the total mix works not just for us, but also for the customer and ultimately for the consumer." It's gotta work for the consumer, otherwise it's not gonna rotate faster than the setup that's already in there. In the end, the customer's gonna support these strategies 'cause it works for them, because it works for the consumer and everyone's better off with the implementation. Yes, a mix of incremental versus cannibalized facings.

Ultimately, by focusing on the consumer, you get a better answer for them. It creates a better answer for the customer. It creates a better answer for the Coke system.

Operator (participant)

Our next question comes from Bonnie Herzog from Goldman Sachs. Please go ahead. Your line is open.

Bonnie Herzog (Managing Director and Senior Consumer Analyst)

Thank you. Good morning, everyone. I was hoping you could provide a little more color on your plans for reinvestments this year, you know, maybe frame for us whether it will be stepped up versus last year. How are you thinking about your marketing spend this year? You know, do you also have plans for that to accelerate? I'm ultimately trying to understand how much flexibility you have to balance the momentum. You know, you're certainly seeing in your business with reinvesting while at the same time letting some of the strengths flow to the bottom line. Thanks.

James Quincey (Chairman and CEO)

Yeah. Sure. We're clearly gonna, as we have in 2021 and 2022, have a bias to invest for growth. That's our starting point. And as we demonstrated in the early years of the pandemic, if we see overall or in any specific countries, that allocation towards driving growth is inappropriate at some sort of level, we've demonstrated the ability to act quickly to redirect the money either somewhere else, or to let it go to the bottom line. We're gonna use all the data we get in from the field to be very dynamic in our resource allocation. We largely feel we have achieved an appropriate level of marketing. Yes, that's gonna increase in 2023 because we're growing the business.

In the same way, as John mentioned, we're gonna increase our CapEx to support the bits of the business where CapEx needs to flow. We are gonna manage all of this with an agile hand, depending on the circumstances. We talked in the answers to the other questions that we don't know what the year will hold. We have a central view that is growth-oriented, that balances volume and price, that accommodates different pressures around the world and different speeds of moderation of inflation. It's a bias towards growth, and we will be fast and adaptable in the face of anything different.

Operator (participant)

Our next question comes from Kaumil Gajrawala from Credit Suisse. Please go ahead. Your line is open.

Kaumil Gajrawala (Managing Director and Equity Research Analyst)

Hey, good morning, everybody. Can you maybe touch on briefly what you're seeing from the retail environment? We're seeing more and more articles on retailers pushing back on price increases across really all of CPG. If you could maybe just give us a sense of what you're seeing in your categories?

James Quincey (Chairman and CEO)

Sure. I mean, firstly, one has to kind of break down the global dynamic because each major region or each country is a different place. But let me start with the central idea that we pursue, which is we need to earn the right to take price. It's not our strategy to think of our business as commoditized, where prices just flow up and down in a kind of mechanical way. We need to earn our pricing by delivering for the consumers value that they appreciate through the marketing, through the innovation, through the RGM, the pricing and packaging work, through the execution, such that they see value in our brands that can sustain the pricing that the input costs are driving us towards.

That ultimately then has to work for the customers. Because it has to work for the consumers, it then flows down to the customers. If we've earned the right to price with the consumers, then we can go to our customer partners and say, "Look, we think that we can lead the beverage category to grow faster than your business. Yes, we believe we're gonna be more competitive because we understand the consumers, and we're gonna gain share, but we can lead the beverage category, deliver more growth for you, and be a disproportionate share of your re-rate revenue growth relative to other categories." What, for example, was demonstrated last year in Europe, where I think we led. We added more revenue growth than any other system for retailers in Europe last year.

That is the platform on which we then fold in the conversations around pricing, and packaging, for any given year. Yes, of course, there's pressure in the marketplace, but in the end, we have an approach we believe is consumer-centric and that drives growth for the customers because they also wanna keep the consumers too.

Operator (participant)

Our next question comes from Chris Carey from Wells Fargo Securities. Please go ahead. Your line is open.

Chris Carey (Head of Consumer Staples Research and Senior Equity Analyst)

Hi. Good morning. You know, clearly, you know, the past several years have had, you know, big variability in your channel and package mix within the overall price mix equation with mobility constraints and sharp recoveries thereafter. You know, just taking John's commentary on a price mix driven year for next year, and James talking about, you know, still volume will still be a factor. I guess what I'm wondering is just underlying within that price mix, whether you think, you know, channel and package mix have normalized, right? You know, it's out of the way. We're not really talking about recoveries in those line items and what's going forward will be kind of more offensive or growing from a normalized base. You know, do you think you're back to that normalized base on...

from a channel and package mix from which to grow? Then in 2023, do you have any thoughts on, you know, what the contribution is from price relative to, you know, channel or package mix? Thanks.

James Quincey (Chairman and CEO)

Firstly, in any given country, channel mix has largely recovered 2019 levels. Yes, there are some exceptions, like China, which is only just now reopening, and a couple of other countries. When I say largely normalized, if you take something like the U.S., clearly there are a number of away-from-home outlets that have dropped out of the marketplace. There's a tail, or there's a last piece of the recovery of channel that is not gonna happen overnight and may not happen for some time to come. In, in headline terms, other than a little bit of -Positive channel effect perhaps in the first half.

I think we can pull a line on the channel mix being or the recovery of the channel mix relative to the pandemic being a major driver of price mix going forward. Yes, package mix will continue to be a factor as it has been in previous years and prior to the pandemic. Clearly, as we pursue a dual strategy of keeping consumers in this franchise with affordability and looking for premiumization opportunities, the two can somewhat offset each other. One's dilutive, one's accretive, but they're both valuable strategies that need to be taken forward.

I think predominantly what you're gonna see in 2023 is the ongoing moderation of rate pricing, both as we cycle rate increases or price increases from 2022 and as inflation in general, and inflation specifically to us, whether it be in SG&A or in commodities, begins to moderate.

Operator (participant)

Our next question comes from Carlos Laboy from HSBC. Please go ahead. Your line is open.

Carlos Laboy (Managing Director and Global Beverage Head)

Yes. Good morning, everyone. The Latin American bottlers keep guiding for stepped up investments in traditional trade DSD capabilities to fully exploit this new cooperation framework they have with your firm. Do you think this is already kicking in to the system's financial performance? Is the model, in your view, adaptable to other parts of the world where the promise of maybe higher ROIC and stepped up bottling CapEx can drive system growth?

James Quincey (Chairman and CEO)

Yeah. Let me take that in parts. You know, the features that we have in the long-term relationship model in Latin America, we're rolling those out in a, in a number of other places. Clearly, the more we can intensify whatever the framework gets called, the degree of alignment towards investing to capture the opportunities in the marketplace, the better off we're gonna be, us and our bottling partners in any given geography. Absolutely, we continue to see opportunities to work even closer together, to capture opportunities, in the marketplace. The nature of those investments, the nature of the opportunity, and are not exactly the same as Latin America. Clearly, the trade structure differs around the world.

Latin America has a number of particular features that are not necessarily replicated in the U.S. or Europe or Japan, for example. The overall concept of a tighter, longer-term investment focus on the opportunities is really gonna drive, continue to drive performance into the future years. I think in Latin America, you know, we've got a great business there collectively as a system, 'cause we focused on investing into the marketplace and into the traditional trade for a very long time, along with all the other customers in Latin America. There are still plenty of opportunities to go for, both from the top line, and from the point of view of improving returns.

I think you'll find or everyone will find that the Latin American bottlers, as bottlers around the world, are. Collectively, we see a lot of opportunities ahead of us to drive the top line and to continue to improve returns on the bottling assets.

Operator (participant)

Our next question comes from Andrea Teixeira from JPMorgan. Please go ahead. Your line is open.

Andrea Teixeira (Managing Director and Senior Equity Research Analyst)

Thank you for doing. Good morning. James, as we think about this 7%-8% organic sales growth guidance, what is the price mix carryover into 2023? You said it obviously will moderate, but are you embedding any additional pricing that is not in the, in the trade yet? How are you planning for China volumes in 2023? What is the benefit from that or any mix dynamics we should be aware of? Thank you.

James Quincey (Chairman and CEO)

Yeah. We're certainly planning for China to become more normalized, sort of reopening, a la the U.S. and Europe. We will see a more normal level of volume in China and recovery to the 2019 or growth on the 2019 numbers starting to come through as we go through the year in China. In terms of the carryover, clearly there's some carryover, particularly in the first half from 2022. We will be taking pricing in 2023. Now, having said we will be taking pricing, the world is very different. I mean, there are countries where inflation is well over 50%, so pricing is taken multiple times a year. Argentina is an obvious example.

In the developed markets, it's likely we'll trend more back towards kind of more standard cycles of pricing, but there will be price increases across the world in 2023 to reflect both the continuing inflation in import and SG&A costs. Obviously, we need to, as I talked about in the previous answer, earn the right to that pricing. There will be pricing in 2023.

Operator (participant)

Our next question comes from Rob Ottenstein from Evercore. Please go ahead. Your line is open.

Rob Ottenstein (Managing Director, Head of the Global Beverages. and Household Products Team)

Great. Thank you very much. Congratulations on a terrific year. Over the last few years, James, you and your team have, you know, made significant cultural changes, organizational changes to the product portfolio. As you look at 2023, what are the key initiatives that you're looking to drive, you know, to set up for, you know, continued strong growth over the next, you know, decade or so, you know, longer term? Perhaps, you know, weave into that answer, you know, where things are on Costa, on BODYARMOR, and on any other new initiatives that you think would be helpful to discuss. Thank you.

James Quincey (Chairman and CEO)

Yeah, great. Thanks, Roy. Certainly we will unpack a little more this at the CAGNY presentation and the CAGNY conversation. I'm sure I won't do full justice to the question in this session. In terms of the initiatives in the marketplace, you know, we've, we have an aspiration of being a total beverage company, you know, everywhere. That's not gonna happen overnight. We need to make progress in a disciplined way in different category, country combinations, as we've talked about, to establish leadership positions, preferably quality leadership positions in the next set of country category combinations on our journey to the total aspirations.

Within that, there are ones that are off to the races and flying away, and there are ones where we still need to demonstrate to ourselves we can execute against the vision. If I take, you know, the two you called out, Costa and BODYARMOR for, to start with, you know, the essential thesis behind coffee remains the same. It's a huge market. It's growing. There's lots of money in it. If we can find a path, there's a tremendous growth opportunity for the Coke system there. We've got a vision. The reality is, timing was very unfortunate, getting it just before the pandemic.

In strategic terms, despite all the experimentation, despite all the learning, despite all the initial steps, in big strategic terms, we haven't advanced because essentially COVID put it on hold for three years. We now need to get the execution ramped up for Costa against the vision, and in the coming years, demonstrate that that holds water. BODYARMOR, great job. We obviously incorporated that into the company last year. I think we, you know, whilst we always expect some level of disruption as we move a business that has been grown quickly and prepared for sale, by the founders into the Coke system, there's often some disruption in the short term. Frankly, I think there was more in 2022 than we expected or would've liked.

We have a good plan going forward in 23 that will kind of reset BODYARMOR on a good path and in a complementary way to Powerade. Other initiatives which we're looking very interested in the degree of traction is some of the alcohol experiments, particularly looking to see Jack and Coke do well. Early data in Mexico launch at the end of last year was encouraging ahead of expectations. The U.S. launch will be very interesting at the end of March. All of that will be backed up by the continued work on the culture and organization. It'll never, you know, nothing ever settles, it never ends, I think really it's about continuing to stand up and execute against the internal initiatives we've already launched. The organization is coming together.

We made a few tweaks in North America, coming into this year, but the organization is getting up and running and starting to hum. The marketing model change, is starting to show good results and promise. I think it's a question of seeing through the things we've launched to really up our game in the coming years.

Operator (participant)

Our last question today will come from Charlie Higgs from Redburn. Please go ahead. Your line is open.

Charlie Higgs (Consumer Staples Research)

Hi, James, John. Hope you're both well. My final question is just on India. Well, it looks like it's had just a record year. Could you maybe just expand a little bit more on India? Is it still being driven by the affordable price point strategy? Are you adding distribution that means maybe this volume growth is actually sustainable over the long term? James, maybe just give some color on your long-term view on India. Thanks.

James Quincey (Chairman and CEO)

Yeah. India had a cracking year last year, and is off to a strong start this year. I think the overall backdrop to this is firstly, that the Indian economy and the Indian consumer base is approaching in highest level terms, a level of GDP per head at which historically the beverage industry has tended to accelerate its development. We are very encouraged by the potential in India to develop a fantastic beverage industry and beverage opportunity. I mean, ultimately, you know, the development industry is very nascent. In India, and there's a huge potential to build the industry over many decades. The.

That's being driven not just by the affordable, entry price points, although they are growing, but really it's a question of actually everything is growing on all dimensions. It's growing in terms of the depth of the different brands, it's growing in distribution, it's growing in number of packages. I think there's a huge long potential in India. It won't, in all likelihood, be a straight line. There is huge potential in India. Really, in a way, India exemplifies the very long-term opportunity of a whole set of emerging markets, India, Africa, parts of Eurasia, parts of ASEAN, to actually... You know, they themselves have 80% of the world's population, and the development of the beverage industry is a third of what it is in the developed market.

They only pay for about, I think three in 10 of the commercial beverages, which is or two in 10 of this, the commercial beverage, whereas seven in 10 in the developed world. India typifies the long-term potential of the beverage industry to keep growing. I think it's a market that is set to take off.

Operator (participant)

Ladies and gentlemen, this concludes our question and answer session. I would now like to turn the call over to James Quincey for any closing remarks.

James Quincey (Chairman and CEO)

Thank you. Thank you, operator. To summarize, we have momentum in our business. We're winning in the marketplace, sustainability embedded in our strategies and strong alignment with our bottling partners. We are pursuing excellence in brand building, innovation, revenue growth management, and execution to add and retain consumers and drive long-term value for our stakeholders. Thank you for your interest, your investment in our company, and for joining us this morning. Thank you.

Operator (participant)

Gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.